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HOW 4 C’S
MAKE A
GRADE-A
BORROWER
Real Estate 2006:
BY CHARLES SCUTT
The Crash That Wasn’t CTW Features

DOCTORS RECOMMEND the two

E’s: exercise and eating right.
If there’s been one outstanding character- Teachers stress the three R’s:
istic regarding real estate in 2006, it’s been reading, writing and ’rithmetic.
the inability to recognize good fortune. And mortgage lenders empha-
Despite the endless claims in 2006 of size the four C’s: capacity, capi-
crashes, busts and slumps, real estate has tal, collateral and credit.
As simple as it sounds, this
been a terrific investment for most people. quartet of factors essentially is
Real estate is a commodity. Like pork bel- what banks and lenders use to
lies and gas futures, prices rise and fall. It’s simply not evaluate a mortgage loan candi-
believable that real estate values always rise in all local date. How a prospective bor-
rower stacks up in these four
markets.
categories will determine
Given that real estate values can and do fall, it follows whether the applicant is a good
that after years of steady appreciation real estate prices risk or a losing proposition.
were destined to stall. However, the important point is that “It’s important for borrowers
if you bought a few years ago the odds are overwhelming to understand the four C’s in
order to best prepare them-
that you’re ahead.
selves to obtain a mortgage
According to the National Association of Realtors, the loan,” says Steve Habetz, presi-
typical existing home was worth $220,000 in September dent,Threshold Mortgage,
2006.You can look at this number and say, aha, that’s down Westport, Conn.“Having
2.2 percent from a year earlier. strengths in all four areas
ensures a consumer’s ability to
But how many people sell in a year? Let’s make a more qualify for the best financing
realistic comparison: In September 2002, the typical home available for the type of mort-
Busy bodies: Areas where shops and restaurants are popping up are areas where people enjoy themselves and, ideally,
sold for $159,000. In just four years, the typical home want to live.Tapping into one of these hot spots before it mushrooms could turn into a profitable investment. gage they wish to obtain.”
appreciated $61,000. Often first on a lender’s
How many of us have other investments that have done mind is credit, which is a meas-
urement of the confidence in

Hot Properties Just as

as well? How many of us have other investments that also the loan applicant’s ability and
provide shelter? willingness to repay a debt.
Interest rates in 2006 eased the real estate slowdown. Using as a barometer the bor-
Freddie Mac figures show that typical rates for 30-year, rower’s credit history and cred-

Plentiful in Cool Market

fixed-rate loans started at 6.21 percent in January, reached it score – as graded individually
by the three major national
6.79 percent in July and by October were down to 6.37 credit unions, Equifax, Experian
percent. and Trans Union – the quantity
The interest levels seen in 2006 did not match the record and quality of the person’s
lows of 2003 (remember 5.21 percent?), but we certainly BY PAUL ROGERS just lukewarm? Well, in a flat or long-range community plans.” credit obligations needs to be
CTW Features down market, those questions Many metro areas are pursuing carefully scrutinized by the
enjoyed bargain-basement financing. In 2000, for example,
can be easier to answer and those sizable facelifts.Those facelifts lender.This is done not only to
you likely paid 8 percent or more for a new mortgage. Or,

W
hile certain regions, cities
in an extreme example, it’s useful to remember that in and neighborhoods still
1981, rates for new mortgages typically topped 16.5 per- are enjoying strong home
cent. appreciation, most agree that
today’s real estate market in gener-
But what of the future? Some points to consider:
al has, at best, plateaued.That’s not
• Much discussion regarding real estate concerns nation- necessarily bad news – particularly
al pricing trends – however, you want to know about for the novice or small-scale
trends in your particular community.What happens locally investor. In fact, many say now
is what matters to you. For this reason, it’s important to might be an excellent time to add
property to a portfolio or start a
read the local newspaper daily to see where development new one – provided, of course,
is heading, to watch for population increases and to track that it’s the right property.
job growth. That begs the age-old real
estate question:What is the right
property? How do you identify
See ASK OUR BROKER, Page 2 those “hot” areas when they are
properties easier to acquire than
in the blazing-hot real estate mar-
ket of recent years.
The key to finding a good real
estate investment is knowing the
neighborhood.That deal property
– the one poised to return the
most profit – may be right in your
own backyard.
“Look at areas you’re familiar
with,” says Mark Nash, a Chicago-
based real estate broker and
author of “1001 Tips for Buying
and Selling a Home” (South-
Western Educational, 2005).“You
know the growth possibilities,
employment opportunities and
don’t come out of nowhere. Read
papers and check online through
city sites. Contact local chambers
of commerce, which tend to
know long-range plans. Libraries
are an often-overlooked resource
nowadays, but librarians know
quite a bit about local govern-
ment, local ordinances and devel-
opment.The information is readi-
ly available and an investor who
gets in on the front end can do
quite well.
The city of Huntington Beach,
Calif., is talking about closing off
See HOT PROPERTIES Page 2
forecast how the person will
manage his credit duties in the
future but to determine the
monthly amount of other, non-
housing related debt he or she
carries. Scores over 750 consid-
ered to be outstanding and
scores under 620 judged as
highly risky.
To Sandy Shaud, host and
executive producer of Real
Estate Investment TV – an
Internet and soon-to-be nation-
ally televised show based in Los
Angeles – credit is the most
See LOANS Page 2

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 BORROWER strates responsibility.
Typically, the benchmark that lenders fol-
ments.When analyzing income, banks want to
see two years of consistent work history, as Ask Our Broker
Lenders look for reponsible low is that principal, interest, taxes and insur-
ance should not surpass 28 percent of the bor-
well as money in checking and savings
accounts, stocks, mutual funds and other
CONTINUED FROM PAGE 1

financial behavior rower’s gross monthly income, which is com-

prised of any salaried or hourly wages plus
sources.These available funds can help to
lower the candidate’s risk level.”
CONTINUED FROM PAGE 1 any extra income from overtime, part-time Although the amount of funds necessary to • In 2006, we saw a significant new-construction slow-
jobs, pensions, dividends or other sources. close a real estate transaction will vary, the down. By reducing new-home construction, supply is
important of the four criteria lenders review. Also, PITI combined with regular monthly minimum capital that lender’s expect borrow- reduced – thus helping to maintain home prices.
“Today, you can get 100-percent financing debts like an auto loan or credit card payment ers to have is approximately 6 to 8 percent of
even on investment properties if you have a shouldn’t exceed 40 percent of gross monthly the sales price.
• It’s difficult to believe that interest rates in 2006
credit score over 680,” she says.“Lenders will income, says Payne. Capital becomes more important as the remained so low – I thought they would surely top 7 per-
throw money at borrowers with good credit.” Shaud says that collateral can be an equally size of the purchase increases, says Habetz. cent, and 7 percent hardly is steep. It’s equally difficult to
Often, a borrower “will not have a clue important C. Collateral is defined as the value Ultimately,“the most important factor to a believe that rates will remain as low in 2007. My reason-
about their credit score until they make appli- of any assets a borrower pledges as security lender is determined by the lender themselves ing? Five straight years of huge federal deficits that amount
cation with a lender,” says Joseph Ventura, man- for a loan – usually consisting of the down and the underwriting practices they follow,”
ager,William Tell Financial Services, Latham, payment plus the value of the property being says Roland Chupik, executive director of
to more than $1.5 trillion plus massive balance-of-trade
N.Y.“Borrowers should check their credit financed.The borrower signs documents at Neighborhood Housing Service of Oklahoma imbalances: $792 billion in 2005 and $432 billion in just
reports before making application with a closing giving the lender a lien against the City.“For example, one lender may put a high- the first six months of 2006.
lender to uncover any obstacles to an accept- bought property, enabling the lender the take er value on high credit scores for qualifying a Deficits and trade imbalances should lead to higher inter-
able credit score.” possession of the collateral (property) borrower while another borrower may relax est rates because they mean more competition for investor
“A credit score is clearly the fuel for the through foreclosure if mortgage payments that factor. Certain lending programs in a com-
mortgage underwriting engine,” says Logan D. aren’t made as written in the contract. munity may give more flexibility to a lender funds, but somehow that wasn’t the case in 2006.
Payne, CEO, Creative Mortgage Partners Corp., The lender must determine the property’s regarding credit scores and capacity.And It seems unlikely that we will be so fortunate in 2007.
Orlando, Fla.“You can make changes to one of value to ensure that the residence is worth as down payment assistance programs usually And so, again, I expect interest rates to top 7 percent. If
the other C’s and they will not have as much much as the amount being lent. In general, the sponsored by a governmental entity either rates do not go up, you can at least expect more than a few
of an effect as movement in the borrower’s loan amount usually shouldn’t surpass 95 per- directly or through a nonprofit organization
economics textbooks will be rewritten.
credit score can.” cent of the appraised property value or 95 may increase a borrower’s capacity to pur-
Ask Adam Brown, vice president of Topdot percent of the home’s sale price, whichever is chase a home.” There are other factors, pro and con, that also will be at
Mortgage, Jericho, N.Y., what he believes less.This is where the evaluation of a lender- Chupik believes there is a fifth C in the work in 2007.
lenders weigh as most important, however, required professional appraiser comes in. process – the one he calls common sense. • The population reached 300 million in 2006 and con-
and he’ll tell you it’s capacity: the borrower’s “The final piece of the puzzle is capital,” “Often, people who desire to purchase a tinues to grow. More people equals more demand for hous-
ability to repay a debt, which is based on his says Brown, which consists of a borrower’s home emotionally enter the process only to
ing.
work history and income. Banks and mortgage total property and cash assets available for find they cannot afford the home. Borrowers
companies want to be sure that an applicant securing a mortgage loan and for paying off must be realistic about the home they can • The employment picture nationwide remains positive,
has a stable earning source that is likely to debt.“Lenders want to be sure that the client afford and must investigate their ability first.” but there are big differences in local communities. Shut-
continue and a financial lifestyle that demon- has the money needed to make their pay- © CTW Features downs in the auto industry, as one example, have battered
many state and local real estate markets.
While a growing population (more demand) and
neighborhood, called home by On the other side of the coin ance, you are better off buying in reduced homebuilding (less supply) favor price stability if
EXPECTATIONS high-profile artists and film peo- are those areas that you may not an average neighborhood and tak- not higher home prices, higher interest rates could quell
ple. But back in the late 1980s, it even have heard of. ing average appreciation. If you demand and thus slow home-price growth. Competing
Risk tied to desired was considered a frontier. Still, it Thomas points to one area are more risk tolerant, you can go market forces do not all point in one direction, a reality
was less congested than other north of Mission Viejo, Calif., on into edgier neighborhoods that
length of ownership areas of Manhattan and home other side of the reservoir with look like they have a bigger
that may suggest moderate pricing movements up or
shoppers could get more space limited access.“Really tucked,” he upside,” says Nash. down.
CONTINUED FROM PAGE 1 for the dollar.A couple good says.A 3,000-square-foot single- But there’s no telling when There is, however, a new and unknown factor in the mar-
traffic on the main street in its restaurants set up shop, some big family residence in Mission Viejo that upside might actually go up. ketplace: Since 2001, many homes have been financed
downtown area and turning it name celebrities moved in and might now run $750,000, but the The Rogers Park area of Chicago with interest-only and option adjustable-rate mortgages –
into a pedestrian boulevard. upgraded spaces. same home in that tucked neigh- has been “on the cusp of popping
“They’ve been talking about it “Then they built a couple great borhood would price out at for five years and can’t seem to so-called “non-traditional” forms of financing that permit
for a long time and it will eventu- schools in the neighborhood, and $675,000. Still, when the market get there,” says Nash.“And it’s not low initial monthly costs. But what will happen when
ally happen.And when it does, it was a foregone conclusion,” turns back up, the tucked proper- going to happen in 2007 or 2008 “start” rates end and required monthly payments increase
the closer to that you are, the bet- Bitton says.“Take your hint from ty will be right there at $750,000. either.As a generalization national- and sometimes double?
ter off you are,” says Steven the experts. If Donald Trump In your research, watch for ly, I don’t think 2007 is the year to
One possible and logical result would be a cascade of
Thomas, a RE/MAX broker/owner moves into an area, chances are negatives, as well as positives. take real estate risks.The market
in Orange County, Calif. the area already is there or about Make sure there isn’t a proposed is still correcting and what we owners selling homes at discount prices because they can
Some of the evidence is direct- to happen. Follow their lead, just landfill or new four-lane highway don’t know yet is whether there no longer afford monthly payments. Such fire sales would
ly in front of your face. like you would listen to stock on the drawing board.Watch for are enough buyers to absorb the push down home values, generally, and few local markets
“Look at demographics, where market gurus for stock advice. industrially zoned property. Even pool of inventory we have.” would be immune.
small boutiques, where great Listen and read and become as if no industry is there at present, Of course, all is tempered by
That’s scary stuff – and reason to finance and refinance
restaurants, where interesting educated as possible.” as long as it’s zoned for industrial, how long you plan to hold the
shops are popping up.Typically Look to the fringe areas of it could legally happen.And property.The longer you plan, the with fixed-rate loans.
those areas mushroom a little bit established neighborhoods, as watch out for areas that are being less risky the buy.
and people want to live where well as those that back up to saturated with new housing. “I really have not seen people © CTW Features
they’re going to have a good severe locations, such as power All is a matter of risk tolerance. who held onto property 10 years
time,” says Ellen Bitton, chief exec- lines, major streets and highways. Even if signs point to yes, there lose money,” says Bitton.“A five- to Need real estate advice? Peter G. Miller, author of “The
utive officer, Park Avenue Both are the fastest to lose their are no guarantees the investment 10-year horizon is sufficient to Common-Sense Mortgage,” would love to hear from you. Send
Mortgage Group, New York.. value in a down market but will immediately make money. have appreciation.” your questions to peter@ctwfeatures.com.
Tribeca is a trendy Manhattan rebound best in a hot market. “If you have low risk toler- © CTW Features

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